Transaction Costs

 Transaction costs, or, What matters more: your brain or your wallet?

Image of John Lennon's mind. "Mind Games" by Derek Davalos.

Mind Games” by Derek Davalos / CC 3.0

What motivates people to settle their lawsuits once a case is open?

Courts across the United States are experimenting with different models to nudge parties toward resolving disputes short of trial. One model mandates that parties attend a “settlement day” prior to their scheduled trial date. Unlike other mandatory court-affiliated settlement, however, there is no prescribed mediation or conference before the judge or other judicial officer. The only difference between settling in court and settling out of court is just that: the court.

The economic theory of transaction costs posits that a variety of obstacles (e.g., time, finances, reputation) can impede mutually beneficial agreements. One of its main lessons is that two parties will always reach an agreement—regardless of who holds a legal right—when transaction costs are zero. In courts and other public policy decisions, the goal is often to minimize transaction costs to facilitate negotiation. By extension, under this line of thinking, raising transaction costs would make an agreement less likely.

The mandatory settlement day effectively represents one of those transaction costs to the parties, who are otherwise free to negotiate and settle without taking the time off work to travel to court and spend the day in the courthouse. This is particularly true in eviction cases, where both parties clearly are familiar with one another and at least one party quite literally knows where the other party lives.